Rumors of Chinese Buys and Other Bullish News
Mar 13, 2012
An important hurdle the market will be looking to clear will come on Thursday as the Fed is scheduled to release the results of their latest bank "stress test." If the good doctors give a thumbs-up and a healthy report, we might just start to see the banks get more aggressive with their investments, once again a more bullish tone could be coming our direction. Obviously if the "stress test" results are poor the more riskier asset classes will be forced to take a few steps back and reevaluate. Personally, I am thinking the "stress test" is going to be better than anticipated.
As long as the "political" picture and government "policies" continue to provide a nice tail-wind, I see no reason to turn our "bullish" ship around. Make sure you understand what the markets are focused on and more importantly what "defensive scheme" they are running.
Corn traders yesterday were reporting lower volume than what you might expect on a double digit rally, but massive call buying was seen in the May contract. I was surprised to hear talk that over 15,000 corn a calls had been purchased in the $7.00 to $7.60 range... certainly makes you wonder who knows what???
Respected analyst John MacIntosh of the Rand Corporation and long-time grain market consultant published an extremely bullish report over the weekend that seemed to carry a lot of weight. John has been extremely bullish for months now and continues to argue that the USDA has erroneously miscounted the US corn crop. For years John has done an excellent job of predicting the crop, and I would think twice about second guessing his efforts. In the end though, the trade will be left to decide if John is correct in arguing the crop has been widely misrepresented or the USDA has properly assed the production.
The trade seems to be divided into two camps. The "bears," who believe corn ending stocks are heading higher based on better than expected corn quality out of last years' crop and less ethanol grind than expected. On the flip side the "bulls," who continue to talk about limited corn supplies and the unusual strength in the cash market. The question the "bulls" desperately need answered though is whether there is actually any of last years' crop left (meaning the USDA underestimated it), or are the bushels here at home simply being held tightly by the cash flush farmers. If you are asking me, my bet is on a combination of the two. Yes, I would suspect the USDA mixed-up last years early harvested bushels, but I would also suspect this years early harvested acres will be counted towards "old" crop bushels as well (hence no "major" shortage will occur). I also believe the US farmer has increased their storage capacity and would rather have their money sitting at home in the bin than with a firm like MF Global where they have the chance of loosing it. Money in the bank right now is earning zero interest, and I have a strong feeling no one has a lot of confidence in the "value" of the US dollar in light of our mounting debt and "propensity-to-print" more greenbacks. My guess is enough bushels are around to get us through, but it is obviously going to take higher prices to smoke out the bushels from the tight fisted farmers.
The boys over at Goldman seem to be thinking corn may actually have some room to work towards the upside as well in the "old" crop. I heard talk circulating yesterday, they also believe the recent run up in soybean prices will encourage more last minute acres to move into soy and possibly put a damper on a few of the extra corn acres that were going to go in the ground. Can't say I disagree with them, but I am apprehensive to believe it will be any type of significant shift. Encouraging though to hear talk from a few of the bigger players that they are once again turning "bullish."
There continues to be more rumors circulating in regards to surging domestic Chinese corn prices and how private Chinese importers and mills will soon start importing more corn. From what I have heard, end users in China are now paying closer to $400 a ton for domestic corn, when they could get US corn, freight included, for closer to $325 or $350 per ton. As you can imagine, this is causing the trade to give more weight to the Chinese buying rumors.
Really the only major "new" negative talk floating around this morning in regards to corn is the fact Argentina has reportedly sold 5-7 million metric tons of new crop corn to China, and the fact the Indonesian government believes their corn imports will fall from 3.5 million tons to just 1.5 million this year because of a much better crop.
Soybeans in my opinion should remain firm until the trade can get a better handle on 12/13 ending stocks. As we sit here right now the trade is trying to digest numbers between 50 and 150 million bushels while the USDA is closer to 205 million. I still think there may be a little let down soon as the infrastructure situation in South America improves and some Chinese purchases shift back their direction. Remember the trade seemed a little disappointed after hearing a few cargoes of Argentine soybeans were sold to China last week. I would have to imagine as we start to hear more talk like this along with larger South American sales the "bulls" may temporarily start to question their faith. I would suggest remaining patient, and not getting overly bearish, as there seems to be good sources indicating some additional cuts may be coming down the pipe, along with reports of increased domestic demand in South America, ultimately cutting back on the number of available soybean bushels for export. I also like the fact Chinese insiders yesterday were throwing out talk of 56 million in total soybean imports for this marketing year in comparison to the 52 million they imported last year.
Export inspections for wheat were certainly a pleasant surprise yesterday, basically doubling what many in the trade were looking for. There also seems to be higher hopes that US wheat exports will continue to stay competitive. I would like to say I am in this camp, but I continue to be worried about what lies around the next corner, especially in the way of global competition. I believe we have to keep our eyes on the cash market, and in particular what is happening with the Russian and Argentine wheat exports. I did hear reports yesterday from Ken Morrison that Matif Wheat premium over KC Wheat is now the widest it has been since August 2010, this may actually mean US wheat will stay competitive longer than I am currently anticipating. If we can get through the next couple of months with adequate demand then we could start to see the funds take on a more bullish tone... I wouldn't hold your breath. I am also thinking growing conditions for US wheat are improving as of late, so we may see some weather premium taken out of the market. On a more global scale there are some dry weather conditions and concerns occurring in Western Europe and Northern Africa that we need to put on our radar screens.
As I continue to preach, wheat and corn have made a shift. Every time we see wheat make a move to higher ground it is met with heavy sell pressure and trades right back down to a more competitive level with corn. Until something drastic changes with supplies you have to believe wheats primary job will be to act as an alternative feed grain source to corn, therefore staying highly competitive or even trading at a slight discount in order to encourage more demand.